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Maturing solar unlocks fresh potential

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HSBC's latest regional Energy Roundtable addressed several themes on the fast evolution of solar power in MENAT, including its pivotal role in the push for green hydrogen and the need for more capital.

Resilient; this best describes the region’s solar market. Beset by a pandemic that triggered the world’s worst economic state in nine decades1, limiting funds and more risk-averse strategies, global demand for solar power still climbed by 15% year-on-year in 2020.2 And despite the swathe of pressure points, the regional outlook is very bullish. For example, there is a staggering 72% increase in solar power from 2019-2025 across MENAT, rising from 4,947MW to 8,500MW in just six years, according to HSBC’s data. In the Middle East alone, there is a 65% growth during the same period, reaching 7,000MW by 2025.

“The region, including the biggest economy, Saudi Arabia, is successfully rewriting the story that going green risks GDP. Instead, a greener future – with solar power generation as a primary focus – could herald one of the biggest economic opportunities of the decade,” said Hanan Bakr, HSBC’s Sector Head of Energy in MENAT. For one, Saudi Arabia’s Finance Minister Mohammed al-Jadaan, said in late-April this year that the Kingdom, the world’s biggest oil exporter, could save more than US$200bn over the next decade, by replacing liquid fuel used for domestic consumption and leveraging gas and renewable energy sources.3 Such positive momentum exceeds energy security, with delegates hopeful it can also boost job creation in a region with one of the world’s highest youth unemployment rates.4

Strengthening of inclusivity

There was strong sentiment around needing to strengthen the ethos and reality of collaboration within the solar sector, with agreement that inclusivity helps unlock greater business and climate opportunities, making the Paris Agreement targets viable. “To achieve the goals of the Paris Agreement, we now need extra effort at a faster pace – and this includes solar. Leveraging geostrategic opportunities in MENAT, all stakeholders must keep pushing ahead, be they regulators, governments, banks or other key players,” said Daniel Howlett, HSBC’s Regional Head of Commercial Banking for MENAT.

Husam Al Ghailani, Executive Manager of ACWA Power, forecasts that “renewables will be a major component of the energy mix in different jurisdictions across the GCC. It is now a question of deployment and implementation…we need to make sure that we are shaping our actions in a way that makes necessary impacts in those countries.”

A key area of cooperation surrounds the intensifying focus on environmental, social, and governance (ESG) – increasingly a non-negotiable part of financial agreements in the Gulf Cooperation Council (GCC) and wider MENAT. The view around the table was that companies are increasingly and actively re-evaluating projects in their portfolios based on the strength of their ESG credentials. In one illustration of businesses’ seriousness, Turki Al Shehri, Chief Executive Officer of ENGIE in Saudi Arabia, said his company opted to withdraw from highly profitable projects purely because they lacked a robust sustainable outlook.

Another key point of collaboration will be highly valuable is in generating more flexibility in the system. As solar power generation rises, the options for dispatchable generation, demand response, grid interconnections and energy storage must rise with it. For example, Saudi Arabia’s target to have 30GW generated by renewables by 2025 implies solar accounting for approximately 30%+ of peak demand, flagged Dr Steven Griffiths, Senior Vice President of R&D at Khalifa University in Abu Dhabi. Yet, this will stretch the limits of what the Kingdom’s power sector can accommodate without operational and technological changes.

Therein lies the need to better utilise the tools of the 4th Industrial Revolution to help balance a grid with high shares of renewables, such as artificial intelligence (AI) and machine learning (ML). The benefits of proactively using the wide array of tools available – including big data and predictive analytics – are clear. Last December, the Abu Dhabi National Oil Company (ADNOC) announced US$2bn of cost savings over the past five years thanks to leveraging advanced technologies and digitalisation.5 Integrating such digital efficiencies into the solar market will become more pressing as generation capacity and energy demand swell.

Green hydrogen potential?

One of the most exciting growth areas in solar for MENAT is leveraging its pivotal role to help create a green hydrogen market, both for domestic use and exports. Green hydrogen is created through electrolysis, powered by clean renewable energy such as solar, wind or hydro power. By contrast, blue hydrogen is generated from traditional fossil fuels such as natural gas, with the CO2 byproduct captured and stored using CCUS technology. While green hydrogen is still an embryonic market, its potential – and regional leaders’ momentum to support it – is vast. Griffiths highlighted that the IEA Sustainable Development Scenario (SDS) sees future hydrogen demand rising sevenfold by 2070. Strong cost competitiveness and a burgeoning solar power market mean delegates see the Middle East becoming a major green hydrogen exporter beyond the 2030s, with importers in North America, Europe and Asia.

“In part thanks to the growing solar power market, green hydrogen exports will happen for the Middle East. But the region must build those ambitions and make them much more visible, so they can pin down more and more opportunities with potential importers and partners,” emphasised Dr Griffiths.

Strong momentum is certainly underway. In mid-April this year, ADNOC announced plans to explore hydrogen opportunities with India6 and in January, the state-owned oil company joined Abu Dhabi state investor Mubadala and state-owned holding company ADQ to form the Abu Dhabi Hydrogen Alliance. One of the key goals is to export green hydrogen to emerging international markets.7

Plus, the world’s first blue ammonia shipment from Saudi Arabia to Japan last year potentially opened a new route to a sustainable future8, while the Kingdom and Germany agreed to cooperate on a hydrogen export-import business in March.9 And last year saw Air Products, ACWA Power and NEOM sign a USD$5bn deal for a production facility in the Kingdom for what is expected to be the world’s largest green hydrogen project.10 Amid the understandable excitement, delegates point out that it will take years to curate a robust import-export market and that more support factors are needed, including better government policy.

Rethink capital norms

Such ambitions for solar – both as a stand-alone market and as an agent for green hydrogen – require great amounts of capital. The historical route to expand the solar market via sovereign guarantees or dealing exclusively with major credit rating agencies is no longer sustainable, delegates said.

“Despite the crisis, we saw more solar projects close in 2020 than in 2019 – and we expect the same in 2021. But financing options must mature to keep pace with the enormous market growth. We need even more complexity and sophistication in financing packages and a broader range of players’ willingness to invest,” explained Turki Al Shehri, Chief Executive Officer of ENGIE in Saudi Arabia.

Delegates also went on to express the need for more dynamic financing solutions to support opportunities in the short-term. “The temporary power business is fundamentally incompatible with the project financing model. Say a company goes and signs a large-scale renewable power contract for the next 25 years. Unfortunately, it takes two to three years for that project to get off the ground and in the meantime, that company still needs energy, so they rent diesel generators and burn expensive diesel. Solar PV would be much cleaner and cheaper but for this use case nobody has access to the kind of cheap financing that has powered the large-scale revolution in terms of deploying renewables here in the region. So that’s a real opportunity for a new financing model.” said Daniel Zywietz, Founder & Chief Executive Officer of Enerwhere.

Arguably, even in a COVID-19 economic environment, investing in solar has never been an easier sell. Projects have generated some of the world’s cheapest energy prices with successful projects across MENAT, notably in Saudi Arabia, the UAE, Morocco and Jordan.

Keith Bullen, Partner at DLA Piper in Dubai, summed up sentiment for the year ahead: “There will always be pressure points, some major, others less so. But the right leadership means deals in important markets can stay relatively immune and will keep growing – and that certainly includes solar.”

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